1. Copyright © 2011 Pearson Education CHAPTER 10

2. Copyright © 2011 Pearson Education  Is governed both by art and science.  Requires balancing a multitude of complex forces.  Influences every aspect of a small company.  Is an important signal of a product’s or service’s value to customers.  Involves both math and psychology. Ch. 10: Pricing Strategies 10 - 2

3. Copyright © 2011 Pearson Education  Price sends important signals to customers: Quality, prestige, uniqueness, and others.  Common small business mistake: Charging prices that are too low and failing to recognize extra value, service, quality, and other benefits they offer.  Study: Only 15 to 35% of customers consider price to be the chief criterion when making a purchase. Ch. 10: Pricing Strategies 10 - 3

4. Copyright © 2011 Pearson Education  Must take into account competitors’ prices, but it is not always necessary to match or beat them.  Key is to differentiate a company’s products and services.  Price wars often eradicate companies’ profits and scar an industry for years.  Best strategy: Stay out of a price war! Ch. 10: Pricing Strategies 10 - 4

5. Copyright © 2011 Pearson Education  The “right” price for a product or service depends on the value it provides for a customer.  Two aspects of price: ◦ Objective value ◦ Perceived value – determines the price customers are willing to pay.  Value is not synonymous with low price. Ch. 10: Pricing Strategies 10 - 5

6. Copyright © 2011 Pearson Education  Pass along rising costs  Explain the reasons behind price increases  Focus on improving efficiency  Consider absorbing cost increases  Modify the product or service to lower its cost  Diversify your product line  Anticipate rising costs and try to lock in prices of raw materials early  Emphasize the value of your company’s product or service to customers Ch. 10: Pricing Strategies 10 - 6

7. Copyright © 2011 Pearson Education Ch. 10: Pricing Strategies 10 - 7 What Determines Price? Price Ceiling - What will the market bear? Price Floor - What are the company's costs? Acceptable Price Range ? ? ? ? ? ? ? ? ? ? ? Final Price - What is the company's desired "image?" Final Price - What is the company's desired "image?" ? ? ? ? ? FIGURE 10.1 ?

8. Copyright © 2011 Pearson Education A pricing technique in which a company sets different prices on the same products and services for different customers using the information that it collects about its customers. Ch. 10: Pricing Strategies 10 - 8

9. Copyright © 2011 Pearson Education Ch. 10: Pricing Strategies 10 - 9 Three Goals: 1. Getting the product accepted Revolutionary products Revolutionary products Evolutionary products Evolutionary products Me-too products Me-too products 2. Maintaining market share as competition grows 3. Earning a profit

10. Copyright © 2011 Pearson Education 3 Basic Strategies:  Market penetration : a firm introduces the product with a low price for gaining competitors' customers  Skimming: in which a marketer sets a relatively high price for a product or service at first, then lowers the price over time  Sliding-down-the-demand-curve: introduces a product at a high price. Then, technological advancements enable the firm to lower its costs quickly and to reduce the product's price sooner than its competition Ch. 10: Pricing Strategies 10 - 10

11. Copyright © 2011 Pearson Education  Odd pricing 1.99 instead of 2.0  Price lining: price ranges, or price lines. 99, 199, 299  Leader pricing: Marks down of a popular item in an attempt to attract more customers.  Geographical pricing: region, area, zone…..  Opportunistic pricing: When products or services are in short supply, customers are willing to pay more for products they need  Discounts: price reduction designed to encourage shoppers to purchase merchandise prior to an upcoming season  Bundling: The practice of offering two or more products or services for sale at one price.  Optional-product pricing; Pricing optional or accessory products  Captive product pricing: Pricing products that must be used with the main product  Byproduct pricing: Pricing low value by product to get rid of them  Suggested retail prices: print suggested retail prices on their products or include them on invoices or in wholesale catalogs Ch. 10: Pricing Strategies 10 - 11

12. Copyright © 2011 Pearson Education Dollar Markup = $25 - $14 = $11 Ch. 10: Pricing Strategies 10 - 12 Dollar Markup = Retail Price - Cost of Merchandise Percentage (of Retail Price) Markup = Dollar Markup Retail Price Percentage (of Cost) Markup = Dollar Markup Cost of Unit Example: Percentage (of Retail Price) Markup = $11 $11 $25 = 40.0% Percentage (of Cost) Markup = $10 $14 = 78.6%

13. Copyright © 2011 Pearson Education Ch. 10: Pricing Strategies 10 - 13 Direct costing and pricing Direct costing and pricing Absorption costing Absorption costing Variable or direct costing Variable or direct costing Breakeven Breakeven

14. Copyright © 2011 Pearson Education Ch. 10: Pricing Strategies 10 - 14 BreakevenSellingPriceQuantity Example: = Profit Variable cost per unit produced Total fixed costs Total fixed costs + { { x } } + Quantity produced BreakevenSellingPrice = $0 6.98/unit 50,000 unit $110,000 $110,000 + { x } + 50,000 units = $9.18 per unit

15. Copyright © 2011 Pearson Education Price per Hour = Total cost per x 1 Ch. 10: Pricing Strategies 10 - 15 productive hour (1 - net profit target as a % of sales) productive hour (1 - net profit target as a % of sales) Example: Ned’s TV Repair Shop Price per Hour = $18.59 per hour x 1 (1 -.18) (1 -.18) = $22.68 per hour

16. Copyright © 2011 Pearson Education  Credit cards – typical consumer has 4 credit cards. ◦ Research: Customers who use credit cards make purchases that are 12% higher than if they had used cash. ◦ On a typical $100 credit card purchase, cost to business = $2.29 Ch. 10: Pricing Strategies 10 - 16

17. Copyright © 2011 Pearson Education 10 - 17

18. Copyright © 2011 Pearson Education  Credit cards – typical consumer has 4 credit cards. ◦ Research: Customers who use credit cards make purchases that are 12% higher than if they had used cash. ◦ On a typical $100 credit card purchase, cost to business = $2.29 Ch. 10: Pricing Strategies 10 - 18 Installment credit Installment credit Trade credit Trade credit

19. Copyright © 2011 Pearson Education  About 2 percent of online credit card transactions are fraudulent.  Steps: ◦ Use an address verification system ◦ Require a CVV2 number ◦ Check customers IP addresses ◦ Monitor Web site activity with analytics ◦ Verify large orders ◦ Post notices on Web site that your company uses anti-fraud technology Ch. 10: Pricing Strategies 10 - 19

20. Copyright © 2011 Pearson Education Ch. 10: Pricing Strategies 10 - 20 Conclusion Pricing techniques impact every aspect of a company including: ◦ Image ◦ Customers ◦ Cash flow ◦ Profits